Onward: How Starbucks Fought for Its Life Without Losing Its Soul

by Howard Schultz

  When a member of Mike's team got off a particularly harsh negotiation call, Mike reminded him that the typical retail tenant who breaks a lease rarely goes as far as Starbucks was. “Most just walk in, throw the keys on the desk, and walk out.”

  Yet there was only so much our company could do to ease the inevitable sting, and some outraged individuals took their cases to local newspapers, claiming that Starbucks was unfair and not living up to its own standards. Some went as far as suing the company. My personal e-mail account received its fair share of stormy sentiment. The backlash hurt, but our partners and landlords were hurting more.

  Again, I saw a silver lining. The push-back from our customers, our people—even the reaction from landlords—affirmed that Starbucks was a positive force, a mainstay, in many communities. Never before had so many people inside and outside the company stood up and so passionately, so spontaneously, championed our existence.

  “Would people go this berserk if the local Dunkin’ Donuts closed?” wrote Daniel Henninger, deputy editor of The Wall Street Journal's editorial page in an op-ed piece. “What is going on here? It can't be about the coffee.” Henninger's op-ed really captured the nuance and delicate balance at the heart of every Starbucks store:

  A friend said that the Starbucks stores’ bitter-enders reminded her of the protests against the closing of the neighborhood Catholic churches. True. The stores are like secular chapels. No sign on the wall says you must be quiet, polite or contemplative, but people are. Ritual abounds. So too with the refusal to walk two blocks to a nearby Starbucks. Back in the glory days, when cities had a church every 10 blocks, no one would go to a church blocks away with the same service. They wanted their church. But they'd drop into a Catholic or a Presbyterian Church anywhere in America, knowing the feeling would always be the same. . . . I don't go to Starbucks that much. I don't go to the Baptist church either. But I'm glad that we've got one just about everywhere.

  I took some solace in Henninger's analogy, pleased that there were some outside the company who recognized the unique value Starbucks brought to communities. And I was reminded of our value when I read every letter and when I visited dozens of stores during the coming months on a listening tour, holding town hall meetings with partners and customers.

  One day, at a store in Lakewood Towne Center near Tacoma, Washington, an older woman wearing a purple turtleneck raised her hand. “I have a couple of comments,” she said. “First and foremost, I have a 16½-year-old granddaughter in Madison, Mississippi, and when she knew I was going to be seeing you tonight she said, ‘Grandma, get down on your knees and beg, don't let him close the Madison store!’” Then the woman stood up and, to a background of applause and supportive laughter from other customers, she got down on one knee in front of me. What could I say? I smiled and vowed to look into the Mississippi store. And we did. But tragically, like so many others, it too could not sustain itself.

  My heart was heavy, but my belief that Starbucks was about so much more than coffee had never been stronger.

  Chapter 20

  No Silver Bullets

  “We've been searching for some time for a cold beverage concept that will create the type of taste, proprietary nature, and customer excitement that our Frappuccino blended beverages did 10 years ago,” I had said during our second-quarter earnings call in 2008, not yet identifying the new Italian treat by its name, Sorbetto.

  The delicious product that I had urged to market that spring would launch in the summer. “We found something, finally, that took us back to our heritage.” As I described Sorbetto's smooth frozen texture, I emanated sincere, confident optimism about the indulgent, drinkable treat's potential to drive traffic.

  Intuitively, I understood that there was no silver bullet that would save the company. Costco's Jim Sinegal and The Limited's founder and CEO, Les Wexner, both trusted friends, also reminded me of that fact whenever we talked during the transformation. In my mind, I got this point. But in my heart I was anxious, and I could not help but hope that there just might be one thing that would miraculously solve all of our problems. By summer 2008, I was pinning that hope on Sorbetto.

  In our quest to create demand, Sorbetto was not the only promotion hitting Starbucks stores that season. While it was the first really fresh, innovative product platform that Starbucks had brought to market in a long while, our marketing calendar was, true to our history, packed with one seasonal drink and promotion after another, and sometimes overlapping. Starbucks’ promotions were not always strategically synchronized, and customers as well as baristas often felt bombarded as, for example, a blended coffee, a new Tazo tea, and a new food vied for attention. It could be challenging for a singular product to get traction.

  That summer, however, in addition to Sorbetto, two things in particular held tremendous potential to create incremental demand, despite early missteps: Starbucks’ first-ever loyalty program and an emerging health and wellness platform.

  The rewards program I'd announced to applause at the annual meeting had fallen flat its first time out in April because we had launched it in stores at the same time as Pike Place Roast, and it took a promotional backseat to the new brew. As much as our loyal customers clamored for value, without our baristas actively and knowledgeably promoting the card, it simply got lost.

  But when we relaunched the program in June 2008, solo and with more partner training and the customer incentive of getting a free beverage with online registration, its popularity exploded. By July 2008, one million people had signed up, reloading $150 million onto their Starbucks Cards.

  The rewards program may not have had the visceral romance of a new beverage from Italy, but it was nonetheless the beginning of something very big and very powerful for Starbucks. With one in seven customers now using a card, we intended to take the program—and related value promotions—to a higher level. And if we could crack the code on loyalty and value, we would achieve multiple goals.

  See an uptick in sales

  Reward our core customers

  Provide the value people seek in tough economic times without cheapening the brand

  Save money by reducing the number of credit card transactions, and thus some of the millions of dollars we paid in associated fees

  Strengthen the bond with customers inexpensively in combination with our evolving online presence

  We didn't have to wait long for feedback on our card and other value promotions, thanks to MyStarbucksIdea.com. Our customers had not been shy about using the online community to tell us where we had missed the mark and what they liked, and one value promotion that we offered that summer in a few cities that generated positive buzz was our Treat Receipt. Customers who bought anything in the morning could return after 2 p.m. and get any grande cold beverage for $2. Requests posted at MyStarbucksIdea.com prompted us to launch Treat Receipt nationally, which helped us make up for the afternoon slowdown.

  While the Starbucks Card and Treat Receipt successfully catered to our customers’ calls for value and rewards, a second initiative addressed another burgeoning consumer preference.

  Around the world, people, myself included, were beginning to live healthier lifestyles, exercising more often and seeking out low-fat, low-sugar, and natural foods. For Starbucks, catering to this movement, which is as much socially as it is medically driven, is not only wise marketing, but also in sync with our values and our mission.

  As a consumer brand trusted for quality, Starbucks is in a unique position to step into the lucrative health and wellness market and play. Back in January 2008, we'd quietly recommitted to health-related innovation as well as improving the nutritional value of our existing product offerings. Already we'd made progress by reducing the calorie and fat content of our core beverages and baked goods. But I thought we could take it further, and I'd been harboring a vision of how Starbucks might permeate, perhaps even own, this category.

  In the short term, our first breakout health and wellness product would launch in the Un
ited States, the United Kingdom, and Canada in mid-July: Vivanno Nourishing Blends.

  Vivanno is Starbucks’ version of a smoothie. The thick, cold drink is prepared with one whole banana, a proprietary whey and protein powder, dairy or soy milk, and ice. The drink had actually been in development for eight months, and the two flavors we launched, Orange Mango Banana and Banana Chocolate, provided a serving of fruit, 15 grams of protein, and 5 grams of fiber at no more than 270 calories—with no artificial colors or sweeteners or high fructose corn syrup.

  Vivanno faced two hurdles in its attempt to take hold with customers. First, we launched it at the exact same time that we introduced Sorbetto in California. So just as the rewards program had been overshadowed by Pike Place Roast, Vivanno risked getting lost in the attention that we lavished on our new Italian treat. Next, and more complex, was that the bananas that went into Vivanno marked the first time that perishable fruit had to be shipped, kept fresh, and discarded in our stores, posing a distribution and logistical dilemma.

  The new health and wellness platform and the loyalty program both held tremendous potential to drive business in a way that was relevant to both the consumer and the Starbucks brand.

  That said, I was still betting on Sorbetto.

  It was just two weeks before Sorbetto's scheduled launch, and Cliff was shocked. “Where has the margin gone?” he wanted to know.

  On July 15, 2008, three flavors—a yogurt-based Tangy Sorbetto, a slushy Citrus Ice Sorbetto, and a mix of the two, Tangy Citrus Ice Sorbetto—would be available in more than 300 stores in Southern California. The base product had been shipped from Italy to our warehouses. Partners were being trained to prepare the drinks, and the in-store merchandising was bright and bold.

  But we had yet to price the product, and Cliff was disturbed by the options he was hearing and what they meant for returns. A proposal to sell a 10-ounce Sorbetto, slightly larger than a tall cup of coffee, for $1.95 would drop the profit margin down to 16 percent. If priced at $2.25, the margin was 24 percent, nowhere near the 70 percent margin I'd elatedly embraced on our trip back from Italy.

  The margin, it turned out, had been whittled down by higher than anticipated costs of goods and unforeseen complications. Although we planned to manufacture the base ingredient in the United States, for now we were buying and airfreighting it across the Atlantic at great expense, and the weakening value of the dollar against the euro was jacking up the already high costs. What's more, because of the consistency of the beverage, the company had to purchase hundreds of new machines to mix just the dairy-based Sorbetto drink, an investment we could not have predicted back in Italy.

  It was too late to turn back, and hundreds of California stores were decked out in promotional pink decor. Brightly colored oversized “splat” spots had been stuck on store windows and floors. A 10-ounce Sorbetto, in a custom-designed container, was sold for $2.95 (we'd found our margin), and in the first few weeks it delivered a respectable sales pop, selling as many as 40 units a day per store.

  Very quickly, however, problems emerged.

  First, a tremendous amount of Sorbetto was being poured out instead of being served to customers.

  Second, the new machines we'd procured to mix the yogurt-based Sorbetto required up to one and a half hours to clean at the end of each day, doubling our projected labor and sapping barista enthusiasm for the product. Our store partners liked Sorbetto's taste, but not the disciplined cleanup, even after we got it down to 45 minutes. And as we'd learned with Pike Place Roast, barista buy-in is essential to a new product's success in stores.

  And third, Sorbetto contained a lot of sugar, making it a sweet treat that did not satisfy consumers’ cravings for nutritious products or complement our emerging emphasis on health and wellness.

  As summer rolled on, Sorbetto's lower-than-expected numbers rolled in, and we had to accept that it was not generating enough incremental sales to compensate for its complexity and the high cost of goods.

  Disappointed, and feeling somewhat responsible, I agreed with Cliff that we should abandon it.

  At another time and in another environment, or perhaps if we had launched Sorbetto on a smaller scale, we might have been able to tweak the product. It was, after all, delicious in its own right. Instead, we opted to cut our losses because bigger issues required our attention, and we allowed Sorbetto to fade away.

  What happened? I asked myself. Had my thirst for innovation blinded me? Starbucks had once been so good at creating products that right out of the gate transformed consumer behavior. Sorbetto's potential had played into that line of thinking.

  I'd brashly embraced Sorbetto as a silver bullet.

  But there is no such thing.

  Not growing our store count. Not new coffee blends. Not loyalty or value programs. Not healthier foods and drinks.

  Yes, opportunities to transform Starbucks for profitable, sustainable growth existed everywhere, but no single move, no product, no promotion, and no individual would save the company. Our success would only be won by many. Transforming Starbucks was a complex puzzle we were trying to piece together, where everything we did contributed to the whole. We just had to focus on the right, relevant things for our partners, for our customers, for our shareholders, and for our brand.

  Chapter 21

  I Know This to Be True

  “I am sorry.”

  I spoke more slowly than usual to more than 1,000 Starbucks partners gathered in front of me. “And I apologize if anyone in this room feels that we have fractured the culture and values of the company with what has happened over the last few weeks, and specifically yesterday.”

  The ninth floor of the support center was packed with partners standing shoulder to shoulder. The crowd overflowed onto the exposed staircase and eighth floor common area, where people sat on the floor or stood, arms crossed, gazing up at the podium from where I spoke.

  “It was a decision that we had to make,” I explained. “And we made it with compassion.”

  The day before, on Tuesday, July 29, Starbucks Coffee Company had eliminated 1,000 nonstore positions, asking 550 people from throughout the organization to leave. One hundred and eighty of those people were in the greater Seattle area, the majority at the support center.

  As much as possible we tried to conduct each separation meeting face-to-face, and throughout the day managers in every department, together with our partner resources professionals, held some of the toughest conversations of their careers, gently informing fellow partners and friends that they would no longer be working for Starbucks. Separated partners had a few hours to return to their desks, collect their things, download whatever information they needed from their computers, and say good-bye. If they chose to, they could come back over the weekend to collect their items instead. We let our people manage their own exits, without hovering security guards, and provided outplacement assistance, an off-site place to go to learn about their benefit options and how to move forward, a new e-mail account, as well as access to our employee assistance program. Severance packages and benefits were given to all who separated from the company, and they were fair, based on the person's position and length of employment. But still.

  I'd held private conversations in my office with several partners who were leaving, and afterward I walked around the building. People were in tears, hugging coworkers good-bye.

  “This is not personal,” we'd told our displaced partners.

  But of course being laid off is personal, for everyone. It was personal for the people who made the decisions and those who delivered the news. It was personal for the people who had spent years helping build our brand and for those who had only recently joined the company. It was personal for the hundreds of families who would undoubtedly be affected. For parents with mortgages, bills, and kids’ birthdays coming up; for couples buying a house or just buying groceries; for men and women supporting themselves, paying off loans, assisting extended family members, and saving for retirement. And it
was personal for people who had counted on Starbucks for health insurance or child care, or whose dreams were fueled by their 401(k) accounts and company stock.

  I cannot put myself in their shoes. I can only tell you that I am sitting with this enormous responsibility to try and navigate through the most difficult economic conditions that Starbucks has ever faced, an economic situation that has deteriorated every month since January when I returned.

  Across the United States, wages were flat, consumer debt remained high, the cost of gas was climbing, and job losses were mounting. In June 2008, US unemployment had climbed to 5.5 percent, the highest it had been since October 2004. Starbucks was hardly the only organization restructuring, but all this was little comfort as people packed belongings and handed in ID cards before waiting at the bank of elevators for the last time. Few things in life are more personal than arriving home in the middle of a workday to contemplate an uncertain future.